Fight Against Fakes, Not Against Each Other

By+Zhou+Xiaoyan

As Jack Ma， founder and Executive Chairman of Alibaba， breezily discussed building his company from the ground up during a panel discussion at the World Economic Forums annual meeting in Davos， Switzerland， little did he realize that storm clouds were gathering on the horizon.

On January 23， the Internet impresario， who founded his company from his apartment in 1999， told leading figures in business and politics of his plans to take Alibaba beyond China and turn it into an e-commerce platform serving 2 billion customers worldwide.

On the exact same day， the State Administration for Industry and Commerce（SAIC）， charged with maintaining market order in China， released the result of an inspection， accusing Alibaba of having exhibited the worst performance among all e-commerce websites inspected in curbing sales of fake products in its customer-tocustomer marketplace Taobao.com.

Facing these abrupt allegations， Alibaba fought back tooth and nail， resulting in a four-day public spat with the industry regulator. Both sides suffered great losses after the dispute， with the stock price of Alibaba plunging and the SAICs credibility being greatly undermined. The dispute， however， is definitely good news for customers as it brought the governments resolution to crack down on fakes and protect consumers to the forefront. As Alibaba and the SAIC finally made peace， the two sides decided to focus on the solution rather than fighting.

Everyone loses

Headquartered in the eastern city of Hangzhou， Alibaba completed the worlds biggest IPO with its $25 billion listing on the New york Stock Exchange last September， making Ma Chinas richest man overnight.

However， for years， Alibaba has faced complaints that it failed to stamp out sales of counterfeit goods on its e-commerce websites.

According to a report released by the SAIC on January 23， less than 40 percent of surveyed commodities sold on Taobao. com were authentic. After being named and shamed as the online shopping site with the most fake goods in China， Taobao fired back by issuing a statement saying the company was unfairly treated.

Facing Alibabas challenge， the SAIC released a document titled White Paper on Administrative Guidelines for Alibaba， accusing Alibaba of irresponsibly allowing fakes to be sold on its platform. It also said SAIC officials held a meeting with Alibabas top managers in July to discuss the issue， but chose not to disclose that information because it didnt want to disrupt Alibabas pending IPO.

In response， Alibaba said the company did not request the replacement of the white paper， nor has it ever requested the SAIC to delay publication of any report.

The two sides finally buried the hatchet on January 30 when the head of Chinas commerce regulator met with Alibabas chairman Jack Ma to exchange opinions on joint efforts to fight fake products. The two sides agreed that they will enhance communication and explore a model for managing the online market. The SAIC also claimed the white paper it released earlier only contains meeting minutes and does not have legal validity.

The four-day war of words， combined with the fact that Alibaba missed its revenue estimates and reported a 28-percent drop in net profits in the fourth quarter of 2014， has caused the market capitalization of Alibaba to shrink by more than $30 billion in two days ending January 29.

That， however， is only the start of Alibabas troubles， as Alibaba has undergone a lengthy audit by lawyers.

At least five U.S. law firms have launched investigations against Alibaba on the claim of protecting Alibabas investors. Hao Junbo Law Firm， a Beijing-based law firm， is gathering victims of the stock plunge in an attempt to file a class-action lawsuit against the ecommerce giant.

Hao Junbo， head of the firm， told Economic Information Daily that Alibaba had not fulfilled its obligations in information disclosure as it knew about the white paper but chose to not share that information with investors.

He also said the SAIC has no right to determine whether the white paper has legal validity or not. Hao said several dozens of investors who had suffered losses of over $50，000 had already answered his call.

Zhang yuanzhong， a partner of Beijing-based Wentian Law Firm， told The Beijing News that the content of the white paper can still be used as evidence against Alibaba， despite the fact that the SAIC claims it does not have legal validity.

“If what the white paper said did happen before Alibaba listed in the United States， Alibaba may face harsh penalties for their suspected involvement in a false statement and a fraudulent listing.”

The SAIC didnt walk out of the public spat unscathed， either.

Wang Jingbo， a professor at the Research Center for the Governance of Law under the China University of Political Science and Law， said the SAIC should notify business owners of the results of the inspection and give them 15 days to appeal before disclosing the information to the public.

“According to media reports， many online vendors claimed they didnt receive any notices from the SAIC， nor were they informed of their legitimate right to appeal. If thats true， its a clear violation of the procedure law，” Wang said. “Also， the administrative guidance for Taobao is a noncompulsory guideline for businesses or citizens that suggests that they correct their wrongdoings. Therefore， the document cant be given the title of white paper. That title is too misleading.”

Qi Aimin， Director of the Intellectual Property Center for Concerted Innovation at Chongqing University， said the sampling method of the inspection is questionable.

“SAIC selected only one sample from one website and drew the conclusion that the authentic rate was zero percent， while it selected three products from another website and claimed its authentic ratio was 100 percent. Among the 92 total samples， 51 are from Taobao.com， which is clearly biased，” Qi said.

“Its inappropriate for the SAIC to release the meeting minutes of an indoor meeting under the name of white paper，” Qi said. “The SAIC claimed it didnt disclose the information because it didnt want to disrupt the IPO of Alibaba. The withholding of information is against the law.”

Ala Musi， Deputy Director of the Policy and Law Committee of China E-Commerce Association， said Chinese laws dont have a clear definition of “authentic products.”

The SAICs category of unauthentic products include shoddy， refurbished and all unauthorized products. But some unauthorized products are genuine products. Thats too large a category， and the definition is different from customers idea of fakes， he said.

“In addition， Taobao is a customer-tocustomer platform and its questionable to compare it to those business-to-customer marketplaces. Its just like comparing products sold by street vendors to those sold in shopping malls. This kind of false categorization could be very misleading and hurt the development of e-commerce industry，”he said. “If there has to be a comparison， Taobao should be compared to its American peer Ebay.”

Focusing on the real problem

Its widely anticipated that the dispute between Alibaba and the regulator may bring about some change to kick-start a tougher anticounterfeit campaign by both the government and the industry.

During the meeting with Alibaba leaders， Zhang Mao， Minister of the SAIC， reaffirmed Alibabas positive efforts in safeguarding consumer rights， purifying the business environment and promoting self-discipline.

Zhang Mao said the SAIC should find new methods of supervision and set up a mechanism for communication and interaction in an effort to promote the healthy growth of Internet economy.

Alibabas founder Ma said online shopping is a new and rapidly growing sector in China， which should be further regulated and improved.

“Alibaba has always been engaged in combating fake products. Next， Alibaba will actively cooperate with the government， devote more capital and technology to fighting fakes， and further expand its professional team put together for this purpose，” Ma said.

Ma also said that Alibaba would reinforce routine online inspection and sampling tests while making joint efforts with law-enforcement departments.

To this end， Taobao has organized a 300-member “special force” to combat fakes and is recruiting the best talent from society to cooperate with government departments， intellectual property owners and ordinary consumers both online and offline to root out the problem of fake products that has long plagued the company.

According to Alibaba， the company now has over 2，000 employees dedicated to protecting consumer rights and combating fakes.

On the other side of the equation， in order to intensify supervision over third-party e-commerce websites， the SAIC is accelerating the construction of a monitoring system over them. Its expected that the system will be put into use within half a year.

Qi， the expert on intellectual property from Chongqing University， said supervision over product quality is first and foremost the responsibility of government departments.

“There should be a law to specifically regulate how much responsibility e-commerce websites should shoulder in combating fakes. E-commerce websites should have limited responsibilities and the task shouldnt fall on them alone. Otherwise， their development would be greatly hindered，” Qi said.

Wang Chunhui， Director of the Institute of China ICT Development and Strategy with the Nanjing University of Posts and Telecommunications， agreed with Qi， saying that fake products exist both online and offline.

“As a third-party platform， Taobao has the obligation to combat fakes. But only doing that online is not enough， because even if fakes are cleared from Taobao.com， they can still be sold on other online platforms or in brick-and-mortar stores，” Wang Chunhui said.

“If factories that produce fakes are not closed， the source of fake products will still exist and they will always find a way to reach customers，” Wang Chunhui said. “Therefore， combating fakes online is a systematic project and industry regulators should bear the primary responsibility.”

He Bing， Deputy Dean of the Law School of the Beijing-based China University of Political Science and Law， said Alibaba and the SAIC have a lot to work with hand in hand.

“Alibaba doesnt have the right to enforce the law， but it can report information about fake products being sold on its online marketplaces to law enforcement agencies， and the latter have to act swiftly after receiving tips，” He said.